Energy shipments have been making increasingly large contributions to rail companies’ profits as producers search for alternatives to crowded pipelines to get oil to market. Rival CN Rail also highlighted energy sector growth when it reported quarterly results.

CP, which last year brought in 40-year rail veteran Hunter Harrison as chief executive officer to turn the company around, said operating ratio improved 820 basis point to 65.9 percent in the quarter, an improvement that came in ahead of schedule.

Operating ratio, the percentage of revenue needed to maintain operations, is a key measure of railroad efficiency. The lower the number the better.

“CP Rail’s performance from an operating standpoint continues to be robust and we suspect that following an expected low 70 percent operating this year, CP Rail could deliver another 300- to 400-point improvement next year,” BMO analyst Fadi Chamoun said in a client note.

CN operating ratio improved by 80 basis points to 59.8 percent.

CP said net income climbed to C$324 million ($315 million), or C$1.84 per share, from C$224 million, or C$1.30 per share, a year earlier. Adjusted earnings per share, which excludes a significant tax item, was C$1.88.

Analysts had expected earnings of C$1.72 per share, according to Thomson Reuters I/B/E/S.

Operating expenses fell 6 percent to C$1 billion and revenue rose 6 percent to C$1.5 billion.

Challenges Ahead

Analysts expect CP Rail to meet its full-year targets, but its outlook is clouded by the loss of four sizable contracts to CN over the past two years. These include Chrysler, Hong Kong’s Orient Overseas Container Line, liner carrier MOL and container shipper APL Ltd, a subsidiary of Singapore-based Neptune Orient Lines Ltd.

“Going forward, the key to the stock is to some degree dependent on the revenue growth profile, which has been dampened somewhat by share losses in the automotive and intermodal segments,” Chamoun said.

The railroad is also named in an order from the province of Quebec to those deemed responsible to clean up a disastrous runaway train crash in Lac-Megantic that killed 47 people and in a motion for a class-action lawsuit on behalf of residents and businesses.

CP said it was too early to assess the potential liability and damages and reiterated that it was not liable in either proceeding. A motion of appeal of the Quebec order and a notice of appearance for the class-action motion have been filed, it said. (Reuters)